Insurers Ride Out Mortgage Crisis

U.S. life and health insurers are some of the biggest players in domestic financial markets, with $2.89 trillion in invested assets as of year-end 2006, and they have significant and growing exposure to the housing market through various kinds of securities backed by residential mortgage loans.

But so far, they appear to be fairly insulated from the rising number of foreclosures and resulting mortgage defaults because their holdings are concentrated in relatively safe financial instruments.

Life and health insurers' assets have grown by an astonishing 97.9% since 1995 and now account for just over one-third of gross domestic private investment. During the past decade or so, they have consistently held around three-quarters of their assets in bonds -- the figure for the end of 2006 was 75.3% of total assets, or $2.18 trillion.

In 2006, mortgage-backed securities -- both pass-through securities and collateralized mortgage obligations -- comprised 16.9% of invested assets.

There are two big risks to holding mortgage-related securities -- credit risk and interest-rate risk. Credit risk, which is the risk that borrowers will miss payments on the underlying loans, has gotten the most attention lately due to the rising rate of foreclosures among some of the weakest borrowers.

Many of these people took out loans with low, initial teaser rates and are having trouble making payments now that the rates have reset at higher levels. When borrowers stop making payments, they deprive investors of interest income; if they default, investors also risk losing some of their principal if they can't recoup the balance of the loan by selling the property.

The latest survey by Realtytrac shows foreclosure filings surged to 147,708 in April, up 62% on the year but down 1% from March. There was one foreclosure filing for every 783 U.S. households last month.